A recent report from Oxfam revealed that last year, somebody new was anointed as a billionaire every two days. By its estimation, 82% of all the wealth created last year went to the wealthiest 1% on the planet, while the bottom 50% saw no increase in their wealth whatsoever.
The planet appears to have become a twisted mirror of The Titan’s Goblet by Thomas Cole (below).
Amidst a barren landscape, in an oasis high above the rough earth, a few live in paradise. Bathed in golden light, they sail yachts across still water, in a bubble all of their own. Occasionally their water trickles off on to the rusty soil below – this too turns stagnant, and little grows. But the goblet does not stand on solid ground. Perhaps the artist is implying that the goblet will topple, and the waters that have sustained the paradise will fertilise the wastelands below.
They say life imitates art. Looking at this image of US Treasury Secretary Steven Mnuchin with his wife Louise Linton, I’m inclined to agree.
The shot was taken last year, when Mnuchin took a trip to the Bureau of Engraving and Printing to admire his autograph on the dollar bills. They are only $1 bills so I can understand why his wife kept her hand gloved – this is peasant money to deep state insiders like themselves.
There’s hubris within this image which, like the goblet teetering at the edge of the cliff, threatens to seed its own destruction.
Wealth inequality gets the blame for an awful lot of the madness in the world these days. From anti-establishment politicians gaining traction, to youngsters favouring communism and fascism, to billionaires building apocalypse-proof bunkers for themselves in New Zealand…
Where did it all go wrong?
Trust in tatters
In the global fiat currency system we live under today, the creation of bank credit – loans – is critical to economic growth and inflation, which are both priorities of the central bank.
The word “credit” originates from the Latin word for trust, and this meaning is not lost today – credit doesn’t just refer to loans, but the trust that exists between borrower and lender.
So the credit crisis was not just a crisis of bank lending – it was a crisis of trust itself. Trust in the central banks that had allowed the crisis to occur. Trust in their ability to deal with the crisis. Trust in the commercial banks who had extended loans without a care for how trustworthy their customers were. And trust that the entire system would return to normal in the future.
Trust, and subsequently lending, between commercial banks had collapsed. To fix this problem, the central banks flooded the banking system with essentially free money. If all the banks were loaded with cash, surely they would all trust each other again, as none of them would be at risk of going broke. And if they all trusted each other again, they would start lending to each other and to consumers who, it was assumed, were just dying for another loan after getting destroyed by their own debts in the recession.
The free money they extended, through zero interest rates and quantitative easing (QE), was called credit; but this was incorrect, for credit includes trust. Trust cannot be created out of nothing, unlike fiat currency – it must be built.
And so the free money betrayed the central banks. They found that the banks who took the free money were not using it to extend loans to customers or clients, but were instead using it to lick their wounds from the crisis and repair their balance sheets.
Undeterred, the central banks changed strategy. In later rounds of QE, they started shovelling their credit-free money into financial institutions that weren’t banks.
Surely, this credit-free money would be welcome in institutions that don’t extend credit to anybody. And in this they were right – major asset management companies aren’t going to complain when somebody offers to buy up their assets at a higher price.
What did it achieve? Higher growth, and higher inflation?
What it achieved, is what you see in Cole’s painting. For those in the goblet (owners of assets), life is good. Elsewhere, not so much.
Asset prices grew and inflated. And just like in the painting, a small amount of that spilled over into the domestic economy.
But the overwhelming majority of asset owners are wealthy already. And contrary to popular belief, the wealthy don’t actually spend all that much as a proportion of their overall wealth.
By jacking up asset prices, the central banks had given a boatload of money to those least inclined to spend it. And hoarding is the exact opposite of what you want if you’re targeting inflation and economic growth.
The location of Cole’s painting is fitting. It’s hung in the Metropolitan Museum of Art in North Manhattan; just a few blocks down stands the Federal Reserve Bank of New York, where the open market operations of the Federal Reserve are conducted. This is where the trust-free money was created and pumped into the asset markets.
And now here we are today. The goblet stands tall, and those in the oasis sail their yachts without a care.
But perhaps there is trouble brewing in paradise.
When the Levee Breaks
The desperate measures of the central banks in response to the crisis were focused on credit-providing institutions: banks. They neglected the trust and credit of the people who actually run the economy – the consumer, those who actually power the credit system by taking out loans to buy houses and start businesses.
Understandably, their credit – their trust – did not suddenly return to pre-crisis levels when the central banks who had failed to prevent it proceeded to flood the institutions responsible with free cash.
Trust that things will get better in the future is required before taking out loans to start businesses. And almost a decade after the crisis, trust of this kind has not returned. When you take into account that an entire generation was allergic to taking out loans after the Great Depression of the 1930s, this isn’t hard to understand.
Now, despite all the money printing by the Fed, the global supply of US dollars is now growing at its lowest rate since the credit crisis. As dollars are only created by the creation of dollar loans, this reflects a slowing appetite to take on more debt.
As market historian Russell Napier remarked earlier this month:
We greet the New Year with news that the annual growth in US broad money has fallen to the lowest level seen in the post-GFC period: +4.7% in November 2017. As the ninth anniversary of the launch of QE fast approaches, the old-fashioned money miners at the Fed have toiled tirelessly to produce one of the lowest levels of growth in US dollars since WWII…
If this is to be so, then never in the field of monetary reflation will so much have been achieved by so few with so little…
Such low growth in M2 in the US post-WWII has happened before: in the GFC, 2004-2005, 1991-1995, 1970 and 1960. Crucially, however, it has never happened before with interest rates at current levels. Money growth is now well below levels the Fed fought to boost with their balance sheet expansions known as QEII and QEIII. With no currently measurable negative economic impact from this new low for money-supply growth, the Fed is content to raise interest rates. One assumes that they will be happy to continue to do so. The slowdown in the growth of money indicates that a monetary policy tightening is already well under way without need of further assistance from the Fed.
Most financial markets seem not to care two hoots about this slowdown in the growth of money. Are they right and is your analyst wrong to see the failure to generate robust money growth as a portent of negative surprises for growth, inflation and/or asset prices?
Perhaps the water in the goblet is about to turn sour. But at the same time, it looks as though lending restraints are going to be removed from US banks. From Bloomberg:
The Federal Reserve is working to relax a key part of post-crisis demands for drastically increased capital levels at the biggest banks, according to people familiar with the work, a move that could free up billions of dollars for some Wall Street’s giants.
Central bank staffers are rewriting the leverage-ratio rule – a requirement that U.S. banks maintain a minimum level of capital against all their assets – to better align with a recent agreement among global regulators, said two people who requested anonymity because the process isn’t public.
All that free money that had been used by the banks to repair their balance sheets may soon be lent out in one way or another.
But is there an appetite for it? Has it been long enough since the crisis for people to trust in the banking system, and for true credit to return?
I’m sceptical. But what do you think? Do everyday people have faith in the banking system again, after nearly a decade?
I’d love to hear your thoughts: [email protected].
Have a great weekend!
Boaz Shoshan
Editor, Southbank Investment Research
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Category: Central Banks